Default Clustering in Large Portfolios: Typical Events
Annals of Applied Probability, Forthcoming
40 Pages Posted: 9 Jan 2011 Last revised: 29 Apr 2012
Date Written: January 5, 2011
We develop a dynamic point process model of correlated default timing in a portfolio of firms, and analyze typical default profiles in the limit as the size of the pool grows. In our model, a firm defaults at a stochastic intensity that is influenced by an idiosyncratic risk process, a systematic risk process common to all firms, and past defaults. We prove a law of large numbers for the default rate in the pool, which describes the "typical" behavior of defaults.
Keywords: Large Portfolio, Self-Exciting Defaults, Mean-Field, law of large numbers
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